Ch 9 A two period Model Flashcards
(15 cards)
An increase in the real interest rate effect a
makes future leisure less expensive than current leisure. Therefore, current labor supply increases when the real interest rate increases. An increase in the real interest rate also makes future consumption less expensive than current consumption. Therefore, current consumption falls when the real interest rate increases. Alternatively, an increase in the real interest rate raises the rate of return on savings. The consumer can save more both by working more and consuming less in the current period
The primary determinants of current labor supply are
The primary determinants of current labor supply are the current real wage, the real interest rate, and lifetime wealth.
aa
Current labor demand is exclusively governed by the current-period marginal product of labor schedule. Therefore, labor demand depends on total factor productivity and the current-period capital stock.
aa
The representative firm maximizes the present value of its profits.
a
The representative firm should invest until the point at which the net marginal product of capital equals the real rate of interest.
a
The current capital stock does not affect the optimal amount of capital that the firm wants in place next period. However, if the firm has more capital in the current period, a lower amount of investment is needed to achieve the desired amount of capital.
a
An increase in future total factor productivity raises the net marginal product of capital, and therefore investment increases.
a
The government must equate the present value of government spending with the present value of taxes. The government may run a deficit in the current period, but if it does so it must run a surplus in the future period.
aa
- Changes in the lifetime wealth of consumers, changes in current-period total factor productivity, and changes in the current capital stock all shift the output supply curve.
a
Changes in current and future government spending and the present value of taxes shift the output demand curve. Changes in expected future income, future total factor productivity, and the current capital stock also shift the output demand curve.
aa
In a competitive equilibrium, output supply is equal to output demand and labor supply is simultaneously equal to labor demand. The point of intersection of the output supply curve and the output demand curve allows us to find the competitive equilibrium levels of aggregate output and the real rate of interest.
a
A temporary increase in government purchases increases the real interest rate, increases aggregate output, increases employment, decreases the real wage, decreases consumption, and decreases investment.
a
A permanent increase in government purchases does not modify the real interest rate, increases aggregate output, increases employment, decreases the real wage, and does not change investment and consumption.
a
A decrease in the current capital stock increases the real interest rate, decreases the real wage, decreases consumption, and increases investment. However, the effects on output and employment are ambiguous. The decrease in the capital stock lowers the marginal product of labor and shifts labor demand to the left. The decrease in lifetime wealth shifts labor supply to the right. According to which of these effects is strongest, employment may either decrease or increase. If employment falls, then we have fewer workers and less capital, so output must decline. However, if there is a sufficiently large increase in employment, the increase in employment more than makes up for the lost capital, and output may rise.
a
A temporary increase in total factor productivity decreases the real interest rate, increases aggregate output, increases employment, increases the real wage, increases consumption, and increases investment. These results are consistent with the facts that employment, real wages, investment, and consumption are all procyclical.
